Adrian Miller got outstanding performance ratings every year in the mid-1990s. His bosses knew how hard he was working to get the West Los Angeles Veterans Affairs Medical Center's research division out of a $1 million hole caused by financial mismanagement. In fact, Miller and his co-worker, Marnell Davis, were the ones who brought the division's financial crisis to the attention of medical center officials in 1997, shortly after they were hired to get the division's financial house in order. The research division's entire finance staff had quit just before Miller and Davis arrived, leaving a major mess to clean up.

Miller often was in his office before sunrise. As a program analyst with a background in finance, he had to bring accounting order to a division that had more people on the payroll than the budget could bear and outstanding invoices dating back several years that the division didn't have money to pay. In 1998, Miller received a $600 performance award for improving the division's finances. Miller's boss and the research division chief, Dr. Stephen Pandol, regularly heaped praise on him. The medical center's budget and finance officers, Bill Lysaght and Rick Pasquale, also approved of Miller's work.

As of 1998, it appeared that Miller was a prime example of a performance management process in working order. His bosses provided him with direction, he did the work they wanted done and they rated and awarded him accordingly.

Five years later, it appears that Miller and his colleague Davis are prime examples of the perils of performance management in the federal government.

Failing Grade

A sense of socialism runs through the government's culture, says David Walker, head of the General Accounting Office. It's reflected in the performance ratings that federal managers hand out each year. Of employees rated on a 1-to-5 scale, 43 percent in 2001 were rated outstanding, and only 17 percent got anything less than a four on a five-level scale.

Walker, who is Congress' top watchdog over the executive branch, says there's too much of a rah-rah, all-together-now, we're-all-dedicated-public-servants, we're-all-above-average mentality in the government workforce. "We need to adopt true merit-based concepts," Walker says. He's urging agencies to set up performance evaluation systems that make meaningful distinctions among top, good, mediocre and poor performers.

Walker is not alone. Homeland Security Secretary Tom Ridge and Office of Personnel Management Director Kay Coles James are trying to put such principles into practice at the new Homeland Security Department. In February, the Bush administration asked Congress to approve a plan to cut $500 million out of an across-the-board pay raise scheduled for January 2004 and instead allocate that money to workers based on their performance evaluations. The House approved Bush's pay-for-performance plan in May as part of the 2004 defense authorization bill. In addition, Defense Secretary Donald Rumsfeld has asked Congress for the power to create a new pay system that would make employees' evaluations a more important part of annual pay changes. And the National Commission on the Public Service, headed by former Federal Reserve Board Chairman Paul Volcker, recommended in a January report that the government find a better way to reward top performers and reform or drop poor performers.

"Mediocrity and excellence yield the same pay check," the commission lamented.

It was not supposed to be this way. For more than a century, government leaders have attempted to establish a civil service that is merit-based. In 1978, the Civil Service Reform Act pushed agencies away from pass-fail evaluation forms, on which managers generally just checked off the satisfactory box each year, and toward tiered ratings systems that required supervisors to set job standards for their employees at the beginning of each year and evaluate their performance against those standards on a 1-to-5 scale at the end of the year. But many managers never got comfortable with the act's requirements, and the 1978 reforms resulted in little clear linkage between employees' pay and their performance evaluations. In the 1990s, when agencies were given more leeway over their rating systems, many reverted to the old pass-fail forms. As of 2001, about 39 percent of federal workers were evaluated under pass-fail systems again.

Managers at pass-fail agencies actually list the de-linking of monetary rewards and performance appraisals as a goal, arguing that the two-level system allows supervisors to have more constructive conversations with employees about performance, rather than contentious debates over whether an employee deserves a 3 or a 4 on a given standard. In practice, employees often find they get little feedback at all. "Since going to pass-fail, the most I get is, 'You're doing a great job, keep it up,' " says Patricia Armstrong, a program analyst at the Naval Air Systems Command in Lexington Park, Md.

Across government, federal workers don't think their managers are good at performance management. In a government-wide survey of federal employees conducted in mid-2002, the Office of Personnel Management found that:

Only one in four employees thought steps were taken to deal with poor performers in their work units.

Only two in five thought strong performers were appropriately recognized.

Only three in 10 thought their organizations' awards programs provided them with incentives to do their best.

Only one in three thought their organizations' leaders generated high levels of motivation and commitment.

Only one in three thought promotions in their units were based on merit.

From the top to the bottom of the workforce, from inside government and from outside, there is little satisfaction with the state of performance management in federal agencies. Despite decades of effort, accountability in government remains an elusive goal.

Firing Line

Three years after Adrian Miller and Marnell Davis brought the financial problems at the Los Angeles VA Medical Center's research division to their bosses' attention, the two employees received notice they would be fired.

In 1999, the division's financial woes came to VA headquarters' attention, and Miller and Davis were reassigned within the West Los Angeles center, along with Pandol, the research division chief. Pasquale, the chief financial officer, had already transferred to the Phoenix VA Medical Center. Several other officials retired or got new jobs. Pandol received a reprimand in his file, as did Dean Norman, chief of staff and the No. 2 official at the Los Angeles medical center.

Despite Miller and Davis' efforts, and the glowing performance appraisals they had received each year, the finance division was still $1 million in the red. Was the fault in Miller and Davis, or in the culture in which they worked?

Norman, who was two levels up the chain of command, said Miller and Davis had falsely assured him that the financial problems were being fixed. But Pandol and Pasquale, who supervised Miller and Davis, said all members of the management team at the medical center were well aware of the situation in the research division.

Pandol, Pasquale, Miller and Davis worked on a plan to get the research division out of financial trouble in 1997. At first, Miller and Davis proposed asking VA headquarters for a bailout. But Pasquale and Pandol didn't want headquarters to get involved, fearing for their jobs and heeding their bosses' implied wishes, according to Pasquale's testimony at a February 2001 Merit Systems Protection Board hearing. "I reported to my supervisors . . . the extent of the [research division's financial] problem ... and they wanted me to quietly take care of it because they didn't want to have bad news happen on their shift," Pasquale said. So instead, they laid off researchers whose salaries could not be covered by the annual budget. The savings from the layoffs would take several years to make a difference in the budget. In the meantime, Miller and Davis continued to follow the questionable financial practice of their predecessors-switching money around among research accounts to cover the most pressing bills. Their bosses were well aware of their actions, Pasquale and Pandol testified.

Lysaght, the medical center's chief budget officer, urged his colleagues in a February 1997 e-mail not to blame Miller and Davis for the financial crisis. "[We] must avoid killing the messenger. Dr. Pandol and his team [Miller and Davis] are bring[ing] to light and grappling with a problem which has existed for many years," Lysaght wrote.

But Pasquale said blame trickled down at the VA. "In [the] VA, the buck stops with the lowest person you can possibly push it down to," he said.

After Norman sought to fire Miller and Davis in February 2000, Philip Thomas, the newly appointed head of the medical center, reduced the proposed punishment to a 90-day suspension and demotions from GS-12 to GS-9 for Miller and from GS-13 to GS-11 for Davis a few months afterwards.

"They don't have any previous disciplinary history," Thomas said later. "Their performance [records] are outstanding ... But at the same point in time, do I have confidence for them to have any financial responsibilities in the future? No."

Miller and Davis appealed their suspensions and demotions to the Merit Systems Protection Board, noting they were the only employees or managers receiving serious disciplinary action for the research division's financial collapse.

Lacking Credibility

The downfall of the federal government's performance management system is its lack of credibility. Employees don't believe in it. Neither do managers.

A key problem is the set of standards that employees are evaluated against. Job standards were much easier to define in the industrial age than today, now that most federal employees are expected to act more independently and use more discretion. Beyond some basic output measures and standards of conduct, many jobs rely on subjective standards of effectiveness.

Agencies spent 1 percent of their salary budgets on employee awards in 2001, with about half of those awards tied to performance ratings. More than 9,600 employees were terminated for disciplinary and performance reasons in fiscal 2002. But many employees believe that the process of rewarding top workers and punishing or firing poor performers is based less on merit than on favoritism, political pressure or supervisory incompetence. Employees often believe that the managers evaluating them have little real understanding of the work they do. "You have to have line of sight to the work and validity of the criteria," says Ward Mannering, a former federal human resources specialist. "If you don't have those, you have de facto mistrust."

Conversely, many federal managers believe that the performance management system assumes they have bad intentions. Federal supervisors have come to feel that their bosses won't back them up. So they avoid using the system as it was intended. "The amount of effort and paperwork and the stress that I would have inflicted upon myself was more costly than I was willing to spend in order to fire a poor performer," a Defense Department manager says.

Before tying pay decisions more closely to a performance rating system, agencies must improve the system's integrity. "It's really all about credibility and trust," says Kay Frances Dolan, a Homeland Security official involved in the creation of the department's new performance management system. "The ultimate test of a personnel system is, does almost everyone think it's fair?"

Review and Reversal

A case file thousands of pages long sits in the San Francisco regional office of the Merit Systems Protection Board, detailing the story of Miller and Davis. Everyone involved in the case acknowledges that Miller and Davis discovered a longstanding financial crisis at the Los Angeles VA Medical Center's research division. It's also clear from an October 2000 VA inspector general review of the crisis that the division was still $1 million in the hole in 1999.

Miller and Davis each were charged with more than a dozen performance failures, including "failure to ensure the fiscal integrity of the research and development service" and "failure to ensure that falsification of records did not occur."

Norman, the chief of staff who recommended Miller and Davis be fired, argued at the February 2001 hearing that they deserved harsher treatment than their boss, Pandol, who was merely reprimanded. "Were they more culpable, should they have gotten more severe punishment than Dr. Pandol? Is that fair? I would say yes it is, because they were directly responsible for these day-to-day financial operations," Norman said.

The inspector general review agreed with Norman that some blame, at least, should be placed at Miller and Davis' feet. "The practices used by the former managers contributed to serious operational deficiencies in [the] research service," the review said.

But MSPB, in September 2002, sided with Miller and Davis. "Both appellants have no prior discipline, records of excellent performance and there is no indication that their misconduct produced any benefit to themselves, financial or otherwise," the board said.

The board said it would be unfair to harshly punish Miller and Davis when their bosses went basically unpunished. "Although [Miller and Davis] used some questionable budgeting practices, their actions were undertaken with the knowledge of the agency's senior management," the board said. The board reversed Miller's and Davis' demotions and suspensions.

Raises, Not Rewards

There's something of an implicit contract between the federal government and the people it hires. For starters, federal law essentially establishes a government job as a property right-once you have one, it can't be taken away without due process. New employees are often told by hiring managers that even if they start at lower-than-market salaries, the longevity-based federal pay system will take care of them over time. Employees can count on annual across-the-board increases, which have ranged from 2 percent to 5 percent in recent years, plus 3 percent within-grade increases that are triggered by milestones in an employee's tenure. An employee hired in 2000 at a salary of $28,866, for example, could count on across-the-board and within-grade increases to boost his salary to $36,010 by this year-an average 8 percent increase per year. Private-sector employees averaged a 3.8 percent annual salary hike over the same period, according to surveys by WorldatWork, a Scottsdale, Ariz.-based human resources association.

Comptroller General Walker estimates that 85 percent of annual salary hikes in the government take the form of across-the-board and within-grade increases. Those raises go to all but a tiny handful of poor performers. "Part of this is a big cultural challenge," Walker says. "People are accustomed to being treated a certain way."

Because of longstanding rating inflation, people also expect to get high performance ratings. And they're likely to get awards such as bonuses regularly, since such awards tend to be spread out among many workers rather than targeted at a few top performers. The sense of entitlement such practices create, coupled with the sense of socialism Walker observes, creates an environment where managers focus on non-extrinsic rewards to push performance.

"The most successful people that I have supervised had self-motivation, a willingness to take responsibility, a positive attitude and work ethic, and the skills to do a good job," the Defense manager explains. "Other than provide them the goals of our organization, provide as many of the tools and freedoms needed to do the job as I could, help train them, and lead by my own work ethic, I do not feel that I made an employee a 'good' and 'successful' employee."

The fact that extrinsic rewards have not been used effectively in the federal government, despite repeated attempts to instill pay-for-performance measures, suggests that reformers' latest efforts to make performance management systems more meaningful will face an uphill battle.

Marta Brito Perez will be heading up that battle as OPM's accountability monitor. She is reviewing agencies' performance management systems as part of OPM's ongoing assessment of agencies' human resources policies. To get a green light from OPM, agencies must show that most of their employees' job standards are tied to overall organizational goals and that their performance management systems differentiate between high and low performance. OPM only expects 15 percent of agencies to get a green light on performance management by July 2004.

But Perez won't accept excuses about how difficult it is to deal with poor performers. "Managers are there to lead their employees and if they fail to do that, shame on them," she says. "Our biggest problem across government-federal to local government-is that our managers are reluctant to use the system."

Power, Performance and Pay

To the managers who sought to reprimand Adrian Miller and Marnell Davis, their case shows the futility of the federal performance management process. The managers tried to hold people accountable, spent two years in an appeals process and ended up having their decision reversed.

To Miller and Davis, their case demonstrates the politics of performance management. They tried to solve a financial crisis they inherited and ended up having their careers sidetracked for their efforts. In their view, the performance management system was used to shift the blame, not to provide accountability.

Miller and Davis' case also shows that performance management systems do not operate in a vacuum. The culture of an organization, the relationships of managers and employees, and the level of trust in the workplace all affect whether or not performance management systems work in promoting strong performance.

There's danger in paying attention only to the performance management system. "A lot of organizations focus on the back end," says Patricia McLagan, a Washington-based management consultant. "They say, 'Let's just put the squeeze on people. Let's get rid of poor performers. Let's give bonuses for better behavior.' That may not be the real solution. The real problem may be a lack of trust, a lack of clarity about what the vision is; it may be people don't know what their jobs are."

As the latest pay for performance drive gets under way, federal managers will be given more ability to hold employees accountable through extrinsic rewards and power over their incomes. Managers will also have to give thought to how they themselves contribute to, or detract from, their employees' performance.

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